Is Roger Montgomery buying Cochlear?
Cochlear (COH) is one of just a few Australian businesses that can be compared to the likes of Coca-Cola and Johnson & Johnson. So when the company recently announced a recall of its market-leading product, the share market reacted. Does Roger Montgomery believe this is a once-in-a-lifetime opportunity to acquire shares in this extraordinary A1 company at a price less than his estimate of its Value.able intrinsic value? In this appearance on Your Money Your Call, Roger also shares his insights on Drilltorque (DTQ), Matrix (MCE) and gold stocks Silverlake Resources (SLR) and Troy (TRY). Watch the interview.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Tony
:
Hi Roger,
I have been reviewing Northern Star Resources following their (good) Interim report. I notice the Skaffold has a declining future valuation on this company. Is there some way of understanding what drives that view, as many have bullish eps figures for future years?
Thanks,
Tony
Roger Montgomery
:
Have a look at ROE in the Capital History screen and then take a look at the drivers of ROE which is the change in equity and the information in the EPS/DPS screen.
Ash Little
:
Plus Tony,
I will add mine life issues as well plus the greatest thing I have ever learned. You don’t get rich by buy something that is popular.
I have owned NST when it was unpopular and sold it when it is popular. Time will tell if that was a good decision.
Cheers
Harley G
:
I thought I’d just make clear, my view doesn’t apply to industrial commodities. I think they will fall significantly in all currencies in the short/medium term, so my views relate more to soft commodities and gold.
Harley G
:
Hi Roger,
I thought I’d bring up a topic that I think is worth discussion – the different pricing of assets in relation to different currencies and how investors should take this into account when investing. I was going to email it to you but I thought by posting it on the blog both you and others could voice their opinions.
I’ll use gold as an example –
As Australian investors, I think gold (and gold companies) are a far better buy than for other investors, at least at this point in time. In fact I would almost consider it a hedge against China slowing or any other reason for an AUD fall. Australian gold miners report in AUD, and we buy gold in AUD, therefore we should look at the gold price and company valuations using an AUD gold price.
I’ll ignore all the bullish arguments for gold like central bank buying and currency devaluation, and take a different perspective. The USD gold price has run up considerably recently, and has pulled back. So investors are wary of further gold price depreciation. But the same likely won’t occur in AUD. The main worry/risk at the moment is a global recession/European risks. In this case, yes I believe gold in USD will fall. But in the case of a recession, industrial commodities will fall further and will pull the AUD with it. If Europe completely collapses, China (Europe is its biggest trading partner) will slow considerably and its bad debt situation will become much more of a problem as GDP growth will no longer be able to mask the bad credit. If China slows, the AUD will fall significantly. There will be a rush to USD safety short term. Gold in USD will likely fall (depending on the US situation at the time) but in relation to the AUD the fall will at the very least be less dramatic and perhaps stabilise/appreciate.
Case in point is overnight trading in the US. The Fed comes out and announces slower growth expectations. Gold in USD falls from $1800 to $1780. But the AUD went from 1.02 to 1.00. So in AUD the gold price went UP from $1764 to $1780.
So I think its important to think of gold in terms of currencies. It doesn’t just apply to gold, but to all commodities. Look at silver, US investors may have bought at $40 and now are break even. But if you (as an Australian) bought at $40 when AUD was $1.10, you’d be sitting on a nice profit. I know Jim Rogers is a friend of yours Roger, and he is always recommending the best place to make money in the near future is commodities and currencies. A trader/advisor I follow called Martin Armstrong refers to currencies as languages, which I think is a great analogy. What goes up in one currency may go down in another currency. My own portfolio at the moment is in commodites (own physical gold) and gold/commodity related stocks. When you look at the gold price (or any other commodity) make sure you read it in Australian!!
I wanted to mention a company I think is good value at the moment. It’s Northern Star Resources (NST). Yes I know, its a gold stock, and some on the blog prefer to look elsewhere, which is fine, but I wanted to talk about it anyway as I know some will be interested.
I emailed you a while back about the stock, which was when I first bought shares in it. The management bought their main mine at what turned out to be a great price and have beaten expectations since. Bill Beamant (CEO) has a good reputation and actually worked on the mine previously for a different company.
I’d recommend your readers to check it out for themselves. The company is starting to get more attention from investors and analysts. This isn’t to hype the stock. I personally am looking to buy more as the price is dropping recently, awaiting their final report, due out next week. For what its worth, I have contacted the company a few times and they have always been happy to reply.
In terms of valuations, using your methodology, $1400AUD gold price, 15%RR I get around 75c for 2011, up to 90c in 2012. I’m using conservative estimates on total gold production. If I use the numbers the main broker covering the stock uses, the numbers are significantly higher. In regards to this, Roger is your methodology as applicable to commodity producers as it is to other companies? Or do you think a cash flow method would be more applicable in this case?
Sorry for the length of the post! Roger, I appreciate any comments/thoughts, as well as from any other readers.
Roger Montgomery
:
Don’t apologise for such great work. Thank you for the contribution. NST is worth investigating. We use our method to have exposure in a couple of gold producers but the great risk is the inability to predict gold prices that are largely driven by sentiment towards so many other unpredictable things.
Ash Little
:
Very nice post Harley and I agree with a very large portion of what you are saying,
Mine life issues for NST’s Paulsen Mine So I would prefer to use a DCF model from valuation purposes instead of the perpetuity. But this is just my view.
No Adivice BTW I don’t have a licence
I also hold NST
Michael
:
I wouldn’t be buying gold and be speculating that the falls in the gold price would be offset by falls in the AUD. How does doing this have any relationship to value investing? It has absolutely none at all in my view. If you look at the moves overnight you will see that the theory did not hold of gold price falls being offset in AUD terms.
I posted earlier that gold is a bubble, and I believe that the bubble has now commenced it’s deflation process. The gold bandwagon became too full, and even if it does go higher, some hangers on will be shaken off before it does.
Ash Little
:
Hi Micheal,
This is just my view and I once thought like you did but when people say Gold is in a bubble my thoughts are “compared to and measured in what? $US? ……..Surely not.
Yes Gold went down over the last few days but it is still up 26% this year and 177% over 5 years measured in $US. But people who think gold is going up are not looking at this the correct way. We have to tip this upside down…………As Buffet says “Invert always Invert”
Gold is not going up………….. it is staying exacting the same. It is the currency(s) that it is measured in that are going down.
For the past 5 years analysts who cover gold stocks have had the current year as the peak in gold price then falling away after that. This does not sound like a bubble to me, I just can’t hear the Mob chanting “This time it’s different” at the moment.
This is just my view but gold will be in a bubble when analysts stop having falls in future gold prices in their model and start having a rise in perpetuity. The herd will be stampeading then.
Regards
Ash
Harley G
:
Hi Michael and Ash,
Thanks for your replies. Ash, I agree with your view on using DCF. Michael, thanks, I was hoping for someone to post a reply that went against my opinion.
I didn’t suggest buying gold was related to value investing, rather I suggested it as a hedging strategy against the fall in the AUD, and a potential profitable strategy if we fall into a deep recession, where stocks aren’t likely to do well in the short to medium term and maintaining purchasing power of the AUD might be something some people would wish to do. In regards to the fall in gold on Friday, as I mentioned in my post, gold is likely to pullback, it is the longer term I am thinking. In 2008, the gold price fell 30% and the AUD fell almost 40%, Look at a gold chart in AUD over this time and you will see what I mean. Fridays action is, in my opinion, reaction to less printing by the Fed and a more deflationary outlook. But when China’s slowing starts to become more in focus and the RBA lowers (or even mentions lowering) interest rates, the AUD will quickly pull back.
My other view regarding this is that, when the last crisis hit in 08, it was a private debt crisis – so people fled to the safety of public assets like gov bonds and cash. But this time it is a public debt crisis. There is no backstop if governments begin to fall, and real assets become attractive. After everyone flees to USD, then what? This would likely not only apply to gold, I am just using it as an example.
You could well be right, and I do appreciate you posting a counter to my argument – helps me think through my views.